There’s something about the idea of doubling one’s money on an investment that intrigues most investors. It’s a badge of honor dragged out at cocktail parties, a promise made by overzealous advisors, and a headline that frequents many of the most popular personal finance websites and magazines.
Perhaps it comes from deep in our investor psychology – the risk-taking part of us that loves the quick buck. Or maybe it’s simply the aesthetic side of us that prefers round numbers – saying you’re “up 97 percent” doesn’t quite roll off the tongue like “I doubled my money.” Fortunately, doubling your money is both a realistic goal that investors should always be moving toward, as well as something that can lure many people into impulsive investing mistakes.
Here we look at the right and wrong ways to invest for big returns.
The Classic Way – Earn it Slowly
Investors who have been around for a while will remember the classic Smith Barney commercial from the 1980s, where British actor John Houseman informs viewers in his unmistakable accent that they “make money the old fashioned way – they earn it.” When it comes to the most traditional way of doubling your money, that commercial’s not too far from reality.
Perhaps the most proven way to double your money over a reasonable amount of time is to invest in a solid, non-speculative portfolio that’s diversified between blue-chip stocks and investment grade bonds. While that portfolio won’t double in a year, it almost surely will eventually, thanks to the old rule of 72.
The rule of 72 is a famous shortcut for calculating how long it will take for an investment to double if its growth compounds on itself. According to the rule of 72, you divide your expected annual rate of return into 72, and that tells you how many years it will take to double your money.
Considering that large, blue-chip stocks have returned roughly ten percent annually over the last 100 years and investment grade bonds have returned roughly six percent, a portfolio that is divided evenly between the two should return about eight percent. Dividing that expected return (eight percent) into 72 indicates a portfolio that should double every nine years. That’s not too shabby when you consider that it will quadruple after 18 years.